Integrative assignment

2.7 Carry out a full analysis of an industry or sector of your choice (using for example PESTEL,

scenarios, five forces and strategic groups). Consider explicitly how the industry or sector is affected by globalisation (see Chapter 8 , particularly Figure 8.2 on drivers) and innovation (see Chapter 9 , particularly Figure 9.2 on product and process innovation).

REFERENCES

1. PESTEL is an extension of PEST (Politics, Economics, Social and Technology) analysis, taking more account of ecological and legal issues. PEST is sometimes called STEP analysis. PESTEL is sometimes called PESTLE and is also sometimes extended to STEEPLE in order to include Ethical issues. For an application of PEST analysis to the world of business schools, see H. Thomas, ‘An analysis of the environment and competitive dynamics of management education’, Journal of Management Development , vol. 26, no. 1 (2007), pp. 9–21.

2. D. Bach and D. Allen, ‘What every CEO needs to know about nonmarket strategies’, Sloan Management Review , vol. 51, no. 3 (2010), pp. 41–8; and J. Doh, T. Lawton and T. Rajwani, ‘Advancing nonmarket strategy research:

institutional perspectives in a changing world’, Academy of Management Perspectives , August (2012), pp. 22–38.

3. R.A. Slaughter, ‘Looking for the real megatrends’, Futures , October (1993), pp. 823–49.

4. A. Grove, Only the Paranoid Survive , Profi le Books, 1998.

5. S. Mendonca, G. Caroso and J. Caraca, ‘The strategic strength of weak signals’, Futures , 44 (2012), pp. 218–28;

and P. Schoemaker and G. Day, ‘How to make sense of weak signals’, Sloan Management Review , vol. 50, no. 3 (2009), pp. 81–9.

6. For a discussion of scenario planning in practice, see R. Ramirez, R. Osterman and D. Gronquist, ‘Scenarios and early warnings as dynamic capabilities to frame mana-gerial attention’, Technological Forecasting and Strategic Change , vol. 80 (2013), pp. 825–38. For how scenario planning fi ts with other forms of environmental analysis such as PESTEL, see G. Burt, G. Wright, R. Bradfi eld and K. van der Heijden, ‘The role of scenario planning in exploring the environment in view of the limitations of PEST and its derivatives’, International Studies of Management and Organization , vol. 36, no. 3 (2006), pp. 50–76.

7. Based on P. Schoemaker, ‘Scenario planning: a tool for strategic thinking’. Sloan Management Review , vol. 36 (1995), pp. 25–34.

8. See M.E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors , Free Press, 1980, p. 5.

9. An updated discussion of the classic framework is M.

Porter, ‘The fi ve competitive forces that shape strategy’, Harvard Business Review , vol. 86, no. 1 (2008), pp. 58–77.

C. Christensen, ‘The past and future of competitive advan-tage’, Sloan Management Review , vol. 42, no. 2 (2001), pp. 105–9, provides an interesting critique and update of some of the factors underlying Porter’s fi ve forces. A critical overview of Porter’s thinking is also provided in

R. Huggins and H. Izushi (eds), Competition, Competitive Advantage, and Clusters: The Ideas of Michael Porter , Oxford University Press, 2011.

10. D. McIntyre and M. Subramarian, ‘Strategy in network industries: a review and research agenda’, Journal of Management , vol. 35 (2009), pp. 1494–512.

11. This defi nition is from R. D’Aveni, Hypercompetition:

Managing the Dynamics of Strategic Manoeuvring , Free Press, 1994, p. 2.

12. See for example A. Malhotra and A. Gupta, ‘An investiga-tion of fi rms’ responses to industry convergence’, Academy of Management Proceedings , 2001, pp. G1–6.

13. A. Brandenburger and B. Nalebuff, ‘The right game’, Harvard Business Review , July–August 1995, pp. 57–64.

14. See K. Walley, ‘Coopetition: an introduction to the subject and an agenda for research’, International Studies of Management and Organization , vol. 37, no. 2 (2007), pp. 11–31. On the dangers of ‘complementors’, see D.

Yoffi e and M. Kwak, ‘With friends like these’, Harvard Business Review , vol. 84, no. 9 (2006), pp. 88–98.

15. There is a good discussion of the static nature of the Porter model, and other limitations, in M. Grundy, ‘Rethinking and reinventing Michael Porter’s fi ve forces model’, Strategic Change , vol. 15 (2006), pp. 213–29.

16. A classic academic overview of the industry life cycle is S. Klepper, ‘Industry life cycles’, Industrial and Corporate Change , vol. 6, no. 1 (1996), pp. 119–43. See also A.

McGahan, ‘How industries evolve’, Business Strategy Review , vol. 11, no. 3 (2000), pp. 1–16.

17. A. McGahan, ‘How industries evolve’, Business Strategy Review , vol. 11, no. 3 (2000), pp. 1–16.

18. For examples of strategic group analysis, see G. Leask and D. Parker, ‘Strategic groups, competitive groups and performance in the UK pharmaceutical industry’, Strategic Management Journal , vol. 28, no. 7 (2007), pp. 723–45;

and W. Desarbo, R. Grewal and R. Wang, ‘Dynamic stra-tegic groups: deriving spatial evolutionary paths’, Strastra-tegic Management Journal , vol. 30, no. 8 (2009), pp. 1420–39.

19. These characteristics are based on Porter, reference 4 above.

20. A useful discussion of segmentation in relation to com-petitive strategy is provided in M.E. Porter, Comcom-petitive Advantage , Free Press, 1985, Chapter 7 . See also the discussion on market segmentation in P. Kotler, G. Armstrong, J. Saunders and V. Wong, Principles of Marketing , 3rd European edn, Financial Times Prentice Hall, 2002, Chapter 9 .

21. W.C. Kim and R. Mauborgne, ‘How strategy shapes struc-ture’, Harvard Business Review , September 2009, pp. 73–80.

Peter Cardwell

This case is centred on the global advertising industry which faces significant strategic dilemmas driven by the rise of consumer spending in developing economies, techno-logical convergence and pressures from major advertisers for results-based compensation. Strategy in this industry is further explored in The Strategy Experience simulation ( http://www.mystrategylab.com/strategy-experience ).

In the second decade of the new millennium, advertising agencies faced a number of unanticipated challenges.

Traditional markets and industry operating methods, developed largely in North America and Western Europe following the rise of consumer spending power in the twentieth century, were being radically reappraised.

The industry was subject to game-changing forces from the so-called ‘digital revolution’ with the entry of search companies like Google and Yahoo as rivals for advertising budgets. Changing patterns in global consumer markets have impacted on both industry dynamics and structure. Budgets being spent through traditional advertising agencies were being squeezed as industry rivalry intensified.

Overview of the advertising industry

Traditionally, the business objective of advertising agen-cies is to target a specific audience on behalf of clients with a message that encourages them to try a product or service and ultimately purchase it. This is done largely through the concept of a brand being communicated via media channels. Brands allow con sumers to differentiate between products and services and it is the job of the advertising agency to position the brand so that it is associated with functions and attributes which are valued by target consumers. These brands may be consumer brands (e.g. Coca-Cola, Nike and Mercedes Benz) or business-to-business (B2B) brands (e.g. IBM, Airbus Industrie and KPMG). Some brands target both consumers and businesses (e.g. Microsoft and Apple).

As well as private-sector brand companies, govern-ments spend heavily to advertise public-sector services

such as healthcare and education or to influence indi-vidual behaviour (such as ‘Don’t drink and drive’). For example, the UK government had an advertising budget of £285 m (€325) in 2012. Charities, political groups, religious groups and other not-for-profit organisations also use the advertising industry to attract funds into their organisation or to raise awareness of issues.

Together these account for approximately 3 per cent of advertising spend.

Advertisements are usually placed in selected media (TV, press, radio, internet, etc.) by an advertising agency acting on behalf of the client brand company: thus they are acting as ‘agents’. The client company employs the advertising agency to use its knowledge, skills, creativity and experience to create advertising and marketing to drive consumption of the client’s brands. Clients tradi-tionally have been charged according to the time spent on creating the advertisements plus a commission based on the media and services bought on behalf of clients.

However, in recent years, larger advertisers such as Coca-Cola and Procter & Gamble have been moving away from this compensation model to a ‘value’ or results-based model results-based on a number of metrics, including growth in sales and market share.

Growth in the advertising industry

Money spent on advertising has increased dramatically over the past two decades and is estimated in 2012 at over $165 billion (€127 bn, £102 bn) in the USA and

$483 billion worldwide. While there might be a decline in recessionary years, it is predicted that spending on advertising will exceed $560 billion globally by 2015.

Over 2011–12, the Dow Jones stock price index for the American media agencies sector (of which the leading advertising agencies are the largest members) rose about 15 per cent ahead of the New York Stock Exchange average (sources: bigcharts.com and dowjones.com ).

The industry is shifting its focus as emerging markets drive revenues from geographic sectors that would not have been significant 5 to 10 years ago, such as the

GLOBAL FORCES AND THE ADVERTISING INDUSTRY 65

BRIC countries and Middle East and North Africa. This shift has seen the emergence of agencies specialising in Islamic marketing, characterised by a strong ethical responsibility to consumers. Future trends indicate the strong emergence of consumer brands in areas of the world where sophisticated consumers with brand awareness are currently in the minority. (See Table 1 .)

In terms of industry sectors, seven of the top 20 global advertisers are car manufacturers. However, the two major fmcg (fast-moving consumer goods) pro-ducers Procter & Gamble and Nestlé hold the two top spots for global advertising spend. Healthcare and beauty, telecommunications companies, food and beverage manufacturers, retailers and the entertainment industry are all featured in the top 20 global advertisers. The top 100 advertisers account for nearly 50 per cent of the measured global advertising economy.

Competition in the advertising industry

Agencies come in all sizes and include everything from one- or two-person ‘boutique’ operations (which rely mostly on freelance outsourced talent to perform most functions), small to medium-sized agencies, large inde-pendents to multinational, multi-agency conglomerates employing over 150,000 people. The industry has gone through a period of increasing concentration through

acquisition thereby creating multi-agency conglomerates such as those listed in Table 2 . While these conglomer-ates are mainly headquartered in London, New York and Paris, they operate globally.

Large multi-agency conglomerates compete on the basis of the quality of their creative teams (as indicated by industry awards), the ability to buy media more cost-effectively, market knowledge, global reach and breadth and range of services. Some agency groups have integ-rated vertically into higher-margin marketing services.

Omnicom, through its Diversified Agency Services, has acquired printing services and telemarketing/customer care companies. Other agency groups have vertically integrated to lesser or greater degrees.

Mid-sized and smaller boutique advertising agencies compete by delivering value-added services through in-depth knowledge of specific market sectors, specialised services such as digital and by building a reputation for innovative and ground-breaking creative advertising/

marketing campaigns. However, they might be more reliant on out sourced creative suppliers than larger agencies.

Many small specialist agencies are founded by former employees of large agencies, such as the breakaway from Young & Rubicam to form the agency Adam + Eve. In turn, smaller specialist agencies are often acquired by the large multi-agency conglomerates in order to acquire specific capabilities to target new sectors or markets or

Table 1 Advertising expenditure by region. Major media (newspapers, magazines, television, radio, cinema, outdoor, internet) (US$ million, currency conversion at 2009 average rates)

2009 2010 2011 2012 2013

Source : ZenithOptimedia, September 2012.

Table 2 Top five multi-agency conglomerates: 2011, by revenue, profit before interest and tax, number of employees and agency brands

Source : Ad Age, Omnicom, WPP, Publicis Groupe, IPG, Havas.

provide additional services to existing clients, like WPP’s acquisition of a majority stake in the smaller ideas and innovation agency AKQA for $540 m ‘to prepare for a more digital future’.

Recent years have seen new competition in this industry as search companies such as Google, Yahoo and Microsoft Bing begin to exploit their ability to interact with and gain information about millions of potential consumers of branded products.

Sir Martin Sorrell, CEO of WPP, the world’s largest advertising and marketing services group, has pointed out that Google will rival his agency’s relationships with the biggest traditional media corporations such as TV, newspaper and magazine and possibly even become a rival for the relationships with WPP’s clients. WPP group spent more than $2 bn with Google in 2012 (over double the $850 m the group spent on the internet company just four years previously) and $400 m with Facebook. Sorrell calls Google a ‘frenemy’ – the combi-nation of ‘friend’ and ‘enemy’. Google is a ‘friend’ where it allows WPP to place targeted advertising based on Google analytics and an ‘enemy’ where it does not share these analytics with the agency and becomes a potential competitor for the customer insight and advertising traditionally created by WPP.

With the development of the internet and online search advertising, a new breed of interactive digital media agencies, of which AKQA is an example, estab-lished themselves in the digital space before traditional advertising agencies fully embraced the internet. These agencies differentiate themselves by offering a mix of web design/development, search engine marketing, inter-net advertising/marketing, or e-business/e-commerce consulting. They are classified as ‘agencies’ because they create digital media campaigns and implement media purchases of ads on behalf of clients on social networking and community sites such as MySpace, Facebook, YouTube and other digital media.

Online advertising budgets are increasing faster than other traditional advertising media as search compan ies like Google generate revenues from paid search as advertisers discover that targeted ads online are highly effective (see Table 3 ). By mid-2011 Google had a 40 per cent market share of the $31 bn spent on online advertising in the USA, with Facebook also increasing its share.

The disruptive change in the advertising industry at the beginning of the twenty-first century started with the internet. Many industry experts believe that conver-gence of internet, TV, smart phones, tablets and laptop computers is inevitable, which in turn will have a further

major impact on the advertising industry. Advertising on mobile devices, such as smart phones and tablets, is still in its infancy but accounted for 8 per cent of all search advertising in the last quarter of 2011 and is forecast to reach 15 per cent by 2016, which has attracted Google to make acquisitions in this sector.

Factors that have driven competitive advantage to date may not be relevant to competitive advantage in the future. Traditionally this industry has embodied the idea of creativity as the vital differentiator between the best and the mediocre. Individuals have often been at the heart of this creativity. With the emergence of Google, Yahoo, Facebook and Bing, influencing and changing the media by which advertising messages are being delivered, a key question is whether creativity will be more or less important in the future, in relation to breadth of services and global reach.

Sources and references

ZenithOptimedia , September 2012; Advertising Age; Omnicom Group http://www.omnicomgroup.com ; WPP Group http://www.wpp.com ; Publicis http://www.publicisgroupe.com ; Interpublic Group of Companies http://www.interpublic.com ; Havas Conseils http://www.havas.com/

havas-dyn/en/ ; http://www.financialcontent.com . See also The Strategy Experience : the Strategy Simulation designed for Exploring Strategy : http://www.mystrategylab.com/strategy-experience .

Table 3 Advertising expenditure by medium (US$

million, currency conversion at 2009 average rates) 2009 2010 2011 2012 2013 includes advertising expenditure for a few countries where it is not itemised by medium.

Source : ZenithOptimedia , September 2012.

Questions

1 Carry out a PESTEL analysis of the advertising industry in 2012, with particular attention to megatrends, inflexion points and weak signals.

2 Carry out a five forces analysis of the

advertising industry in 2012. Which forces are becoming more negative or positive for the major advertising agencies?

Key terms competences p. 70 dynamic capabilities p. 71 inimitable capabilities p. 77 organisational knowledge p. 80 rare capabilities p. 77

resource-based view p. 70 resources p. 70

In document Exploring.strategy.text..Cases..Gerry.johnson (Page 95-101)

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REFERENCES